Dow index reaches new high as U.S. recovers

Hey there, time traveller!This article was published 5/3/2013 (1374 days ago), so information in it may no longer be current.

NEW YORK -- The stock market is back.

Five-and-a-half years after the start of a frightening drop that erased $11 trillion from stock portfolios and made investors despair of ever getting their money back, the Dow Jones industrial average has regained all the losses suffered during the Great Recession and reached a new high.

The blue-chip index rose 125.95 points Tuesday and closed at 14,253.77, topping the previous record of 14,164.53 on Oct. 9, 2007, by 89.24 points.

The new record suggests investors who did not panic and sell their stocks in the 2008-09 financial crisis have fully recovered. Those who have reinvested dividends or added to their holdings have done even better. Since bottoming at 6,547.05 on March 9, 2009, the Dow has risen 7,706.72 points or 118 per cent. The Dow record does not include the impact of inflation. Adjusted for that, the Dow would have to reach 15,502 to match its old record.

The Standard and Poor's 500, a broader index, closed at 1,539.79, 25.36 points from its record. The last time the Dow was this high, George W. Bush still had another year as president, Apple had just sold its first iPhone, and Lehman Brothers was still in business.

But unemployment was also 4.7 per cent versus 7.9 per cent today, a reminder stock gains have proved no elixir for the economy.

Still, the Dow high is another sign the U.S. is slowly healing after the worst recession since the 1930s. It comes as car sales are at a five-year high, home prices are rising, and U.S. companies continue to report big profits.

The stock gains have helped retirement and brokerage accounts held by many Americans recover. That, in turn, has helped push U.S. household wealth nearly back to its peak before the recession, though many in the middle class are still deep in the hole. Most middle-class wealth is tied up in home values, which are still a third below their peak.

Good economic news Tuesday helped lift stocks. Retail sales in the 17 European countries that use the euro rose faster than expected, China's government said it would support ambitious growth targets, and a report showed U.S. service companies grew last month at their fastest pace in a year.

Dow records are dismissed by some investors as unimportant because the index comprises just 30 stocks. Many professional investors prefer to follow the S&P 500, which, as the name implies, tracks 500 companies. But the Dow has closely followed the ups and downs of its broader rival over the years and is a good proxy for how big companies are doing.

The S&P 500 is up 128 per cent from its March 9, 2009 low, about the same as the Dow. The question now: Can the stock rally continue? Here are four reasons it could:

-- Plenty of cash: Companies have enough money to keep buying shares, which can push stocks up in the short term. Companies in the S&P 500 had more than $1 trillion in cash late last year, two-thirds more than in 2007.

-- Low inflation and interest rates: Inflation has been 1.6 per cent the past 12 months, below the Fed's two per cent target. Interest rates are near record lows; the short-term rate the Fed controls is being kept between zero and 0.25 per cent. The Fed has said it plans to keep the rate where it is until unemployment falls below 6.5 per cent, or 1.4 points lower than it is today.

-- Economic expansion: The economic expansion that began 44 months ago in June 2009 is still relatively young. The previous three expansions lasted 73, 120 and 92 months. And this one may finally be getting traction: Sales of new homes in January hit the highest rate in 41/2 years. Home prices in January were up nearly 10 per cent nationwide from a year earlier. And sales of autos, the second-biggest consumer purchase, reached a five-year high. Most important, hiring is picking up.

-- Stocks still seem reasonably priced based on the earnings that companies are generating. On average, stock prices are 17 times per-share earnings in 2012 versus 19.4 times in 2007. Today's price-earnings ratio is about the same as the average since the Second World War.

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